If you’ve been following this series on the IDEAL advantages of apartment investing you know that IDEAL stands for:
You also know about: the great income you can make, how income determines value, the awesome tax benefits apartments give and how to build equity.
Now it’s time to talk about appreciation – at least how appreciation works in the apartment game.
You can’t just say that your 200 unit apartment complex is worth $15 million and try to sell it just because.
There is a way to create appreciation in your property – and we’ve already touched on it in the last post.
Essentially, you create appreciation by forcing the value. Adding more value is ideal when you are looking to sell your property.
5 Keys to unlocking maximum value
Let’s go back to our old friend the 200 unit apartment complex.
Way back when you purchased this property for $5.5 million and its annual net operating income (NOI) was $550,000.
The market cap rate was set at 10%, so you paid $5.5 million.
Okay, now it’s time to sell.
Let’s say that for some odd reason, you haven’t raised rents or done anything else to the property over the last few years.
Maybe you were on Mars, in a cave, under a rock, with your fingers in your ears… doesn’t matter.
So now you want to sell your apartment complex and you’d like to make a profit.
Here are 5 ways to increase or FORCE the value of your property:
Key #1 – Rent raises
We’ve really gone over this in detail in the last email, so I’m going to blow through it quickly.
Obviously in the real world you can’t instantly raise rents on every unit. You have to honor leases, think about how some tenants will react and might move out, etc.
However, for argument’s sake, let’s say we raise all the rents by $15. Here’s what we’ve got:
200 units X $15 per month X 12 months = $36,000.
Now, using that cap rate of 10, you have added $360,000 of value.
Key #2 – Reducing expenses
Remember how we calculate NOI?
We take the property’s gross income and subtract expenses NOT including the mortgage payment.
Since we are selling, you will want to reduce expenses as much as possible.
Maybe you negotiate a lower trash collection rate or reduce other overhead costs.
Whatever ways you can cut expenses do it as it will have a direct impact on value.
So let’s say you can cut expenses by $14,000.
By cutting expenses, you have added $140,000 of value.
Key #3 – Increase occupancy
Wow, we’re really adding some $$$$ now, huh?
Of course, we’ve been using very simple numbers. The reality is that you’ll probably never have 200 out of 200 units rented all the time.
Occupancy rates vary depending on location, type of building and other factors.
But a good occupancy rate when you are selling is above 90%.
If it is below 90% you will want to take action and get the occupancy rate as high as possible.
Collecting more rent will increase your NOI.
So let’s say that you have 10 empty units.
You can offer move-in specials where the tenant gets their first month’s rent for $99, or a free TV, or an incentive that will get your property occupied as quickly as possible.
For now, though, we’ll just pretend that you’re already at 100% occupancy.
Key #4 – Improvements
One of the best ways to boost the value – and the perceived value of any property is to fix it up.
If you have any deferred maintenance issues take care of them before listing the property for sale.
Spend some money on sprucing up the landscaping, do some painting, re-pave the parking lots, etc.
This also helps to justify raising rents. As well as the next trick – which can add some serious appreciation to your property.
Key #5 – Getting a lower cap rate
The cap rate is determined by the market.
Let’s say for the type of property you own, based on the location, age and other factors, that the market cap rate ranges between 8 to 10.
You’ve done everything we talked about above such as fixing all the deferred maintenance items, and now you have the best property on the block.
Buyers are lining up to purchase your cash flowing monster.
Remember this, the lower the cap rate, the larger your valuation will be.
To recap, we started with an NOI of $550k.
We increased rents by $36k
We trimmed expenses by $14k for an adjusted NOI of $600,000.
At a 10 cap that is a value of $6 million.
At a 8 cap that is a value of $7.5 million.
Do you see now how using these 5 keys opens up the door to massive appreciation?
Just with these few tips, we’ve added $2 million in value to the property.
And even if we couldn’t get a lower cap rate, you’d still be at $6 million or make $500,000 in profit.
Not to shabby…
You can’t create this type of massive wealth investing in single family homes.
Would you agree?
In the next and final post in this series, I’m going to show you how to use leverage – other people’s money – to buy highly profitable apartment properties.
By the way, if you are searching for an IDEAL investment, don’t hesitate to call me at 215-967-1464 to learn more.
I am currently locating opportunities where we can generate massive value. I don’t want you to miss out.